The AUD has seen a remarkable slide in the past few weeks. And it has befuddled many.

Australia is the only developed nation not to have experienced a recession or serious downturn during the GFC. Interest rates are rising and production is strong where, overseas, interest rates are falling or stagnant and the only thing rising unemployment and debt.

Unfortunately the situation facing Australia gets even worse than a bear raid on our currency and share markets. I have been talking with some of the most senior bankers in the country and they say that the European sovereign risk crisis is going to make it more expensive for banks to borrow the vast sums overseas that are required to service Australian home mortgages and business loans.

Perhaps unfairly, the irrationality of the mining tax has lumped Australia into the high sovereign risk basket in the eyes of those overseas institutions who lend to our banks. In particular, the Japanese banks who have been prepared to borrow yen at token rates and lend to Australian banks in Australian dollars, have taken a beating which they may take years to forgive.

At the beginning of this month the Australian dollar was trading around 92.65 US cents. It has fallen an incredible 9 per cent in just under three weeks. Losses in yen have been worse. Over the same period the much maligned euro has fallen just over 6 per cent against the American currency.

The Australian share market has fallen much more steeply than the US share market and our declines have been much more akin those experienced on European exchanges, confirming that were are seen as a crisis country.

The government clearly not only did not understand the effect of the tax on the mining industry but had no concept that when you take such an action at a time when the globe is extremely nervous, there is grave danger that it will trigger a bear raid on Australia shares and currency and endanger our bank borrowing. And that’s what has happened.

Bear raids can fade, especially when there is a degree of irrationality. We are not in the same position as the PIIGS. But once a bear raid gets under way it is multiplied by heavy shorting and panic selling and it can take shares and currency very low. In Australia’s case we are probably overdue for a swing back, but if that swing back does not hold and we start sliding again, then we will fall even further. Remember that unhedged overseas investors are not only being hammered by the fall shares, but the currency as well. Our share market is one of the worse performers in the world to unhedged overseas investors.

The cabinet needs urgently to drastically change the RSPT. Changing it will not repair the damage because confidence has been lost, but it will stop an all-out collapse. Superannuation savings in Australia have already been hit. Another big blow would be devastating.

The Australian dollar is clearly linked to resources – perhaps more closely than anyone had previously assumed or hoped. Below is the is the 9 percent slide and the price of copper over the last 60 days. They look remarkably uniform.